Q2 2019 Earnings Call
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Being recorded I would now like to introduce your host for today's conference Mr., John <unk> Director of Investor Relations you may begin.
Thanks, Catherine good morning, everyone and thank you for joining us for the Andersons second quarter 2019 earnings call.
We have provided a slide presentation that will enhance our talking points. If you're viewing this presentation via our webcast the slides and audio will be in sync.
The webcast is being recorded and it is good and the supporting slides will be made available shortly on the investors page of our website at Andersons <unk> Dot com.
Certain information discussed today constitutes forward looking statements and actual results could differ materially from those presented in the forward looking statements as a result of many factors, including general economic conditions weather competitive conditions conditions in the Companys industries, both in the <unk> in the United States and internationally and additional factors that are described in the company's publicly filed documents, including its 34 Act filings and the prospectuses prepared in connection with the Companys offerings.
Today's call includes financial information, which the Companys independent auditors have not completely reviewed.
Although the company believes that the assumptions upon which the financial information and its forward looking statements are based are reasonable. It can give no assurance that these assumptions will prove to be accurate.
This presentation and todays prepared remarks contain non-GAAP financial measures. The company believes that adjusted pre tax income adjusted net income adjusted net income per share EBITDA and adjusted EBITDA provides additional information to investors and others about its operations.
Allowing an evaluation of underlying operation operating performance and better period to period comparability.
Adjusted pre tax income adjusted net income adjusted net income per share EBITDA and adjusted EBITDA do not and should not be considered as alternatives to net income.
Other income before income taxes as determined by generally accepted accounting principles.
On the call with me today are Pat Bowe, President and Chief Executive Officer, and Brian Ballantine, Senior Vice President and Chief Financial Officer.
We will answer your questions. After our prepared remarks, now I'll turn the floor over to Pat for his opening comments.
Thank you John and good morning, everyone.
Thank you for joining our call. This morning to review our second quarter 2019 performance.
I will begin by providing some color on each of our four operating units.
After Brian provides a business review I will conclude our prepared remarks with some comments about our outlook for the balance of 2019.
And then we'll be happy to address your questions.
Our second quarter adjusted results were considerably better than our reported second quarter 2018 results.
Even in the face.
Unprecedented bad weather in much of our eastern egg footprint.
Given the difficult conditions were very pleased with our results.
The trade group posted much stronger numbers, then the grain group did last year.
What does not have a full benefit of the addition of Lansing trade group.
These results show why our conviction is as strong as ever in our acquisition and integration of Lansing with our legacy grain business.
The group's merchandising and physical Hamlin margins were excellent as was execution as the market inputs created bases and futures volatility.
Our new larger trading and merchandising team did a very good job capturing opportunities in that move in a more volatile environment.
Definitely group's results were lower year over year.
But the group remain profitable despite challenging low margin conditions.
The group focused on reducing costs, improving yields maximizing co product sales and selectively limiting production.
The plant nutrient group performed better than it did last year, even though persistent rain hurt nutrient volumes significantly for the second consecutive quarter.
The group was able to more than offset that shortfall with improved product margins that resulted from containing production costs operating efficiently and maintaining pricing discipline.
The rail group's leasing income remained steady.
Well car sale income was negligible as planned.
Fleet utilization and the number of cars on lease were both significantly higher year over year.
The group's repair business results were lower.
Oh speak later in the call about our outlook for the remainder of 2019.
No Brian will walk you through a more detailed review of our financial results.
Thanks, Pat and good morning, everyone.
We're now on slide number five.
In the second quarter of 2019, the company reported net income attributable to the andersons of $29.9 million or 91 cents per diluted share on revenues of $2.3 billion.
And adjusted net income attributable to the andersons of $32.3 million or 98 cents per diluted share.
The adjusted results include a $3.1 million noncash impairment charge on our remaining Tennessee grain assets.
Our adjusted results were better than those of the second quarter of 2018, when our revenues of $911 million generated reported net income attributable to the andersons of $21.5 million or 76 cents per diluted share.
The company's effective tax rate for the second quarter of 2019 was 27.2%, which was up slightly from the second quarter 2018 rate of 26.6%.
We continue to expect that our 2019 full year effective tax rate will be between 24 and 26%.
Total company adjusted EBITDA increased by nearly $30 million or almost 50% to $88.6 million compared to second quarter 2018, EBITDA of $59.7 million.
Slide six shows the changes from reported pre tax income to adjusted pre tax income by segment for the same two periods.
Total adjusted second quarter pre tax income attributable to the company rose by 14, 8 million $14.8 million compared to the second quarter of 2018.
Our adjusted trade group results significantly exceeded last year's second quarter grain group results.
In large part because we now own 100% of the former Lansing and Thompson's businesses.
The ethanol group remained profitable, but its results decreased significantly in the face of a very poor margin environment.
The rail group's results were better than those of the second quarter of 2018.
When the group recorded $5.2 million of charges related to the scrapping of railcars.
Now, we'll move to the bridge graph for the first half of the year on slide seven.
Adjusted year to date pre tax income increased by $9 million over last year's first half.
As with the second quarter. This was driven by the trade group.
Year to date adjusted pre tax trade group results were up $13.6 million compared to the same period of last year.
The plant nutrient group made up a little bit of ground in the second quarter. Despite some of the worst spring weather on record in our core geography.
However, its year to date results were still more than $4 million lower than the comparable 2018 period.
During the second quarter, we continue to refine the purchase accounting valuation of the acquired Lansing, and Thompson's assets and liabilities and as a result recorded some favorable noncash purchase price adjustments.
When combined with other transaction and synergy capture expenses, the net acquisition related costs, we incurred in the second quarter were negligible.
Through the first half of the year, we recorded $11 million of transaction related expenses or about 27 cents per share.
We also wanted to update our previous guidance regarding the amounts of these acquisition related adjustments that we expect to record in future periods.
We currently estimate that we will incur a total of $17 million of such expenses in 2019.
Followed by $4.3 million during Htwo 2020.
And $1.5 million during 2021.
The earnings per share impacts of these adjustments based on current shares outstanding.
Our 39 cents 10 cents and three cents per share respectively.
As discussed last quarter, the valuation of identifiable intangibles and fixed assets has resulted in additional amortization and depreciation expense of $4.8 million in the first half.
And we now estimate that the total incremental depreciation and amortization related to the revaluation of these assets will be $9.6 million per year.
Or about 22 cents per share through 2021.
We have not formally adjusted reported earnings for these amounts.
Now, we'll move on to a review of each of our business units beginning with the trade group on slide nine.
The trade group reported second quarter pre tax income of $23.7 million.
And adjusted pre tax income of $27 million.
A substantial improvement over the $8.7 million recorded by the grain group in the second quarter of 2018.
The strategic rationale for acquiring Lansing was illustrated well during the quarter as the larger trading team capitalized on weather related price volatility.
In addition, sharp upward movement in both corn and wheat basis improved physical grain margins year over year.
Integration work continues to go well and was extended during the quarter to include a focused effort to integrate thompsons operations.
Part of that evaluation led us to announce yesterday that we intend to sell Thompson's farm center assets in the third quarter.
We expect to record a gain on the sale and the proceeds will be used to pay down a portion of Thompson's death.
Trade group adjusted EBITDA for the quarter was $48 million or almost triple the grain group's second quarter 2018, EBITDA of $16.8 million.
Again, due to strong trading results and appreciation in corn and wheat basis.
Moving now to slide number 10.
The ethanol group remained profitable in an extremely difficult margin environment.
Ethanol margins continued to be impacted by industry oversupply weak exports given the lack of a trade agreement with China and corn supply concerns in the eastern corn belt.
The group earned second quarter pre tax income of $2.6 million or $4.7 million less than in the second quarter of 2018.
Turning to slide 11.
The plant nutrient group managed through the unprecedented wet weather and its geographic markets and generated pre tax income of $15.9 million in the second quarter.
Up 5% from the pre tax income of $15.1 million earned in the second quarter of 2018.
Both primary and specialty nutrient tons were down considerably year over year.
However, improved margins more than offset that shortfall.
Plant nutrient EBITDA for the quarter was $24.9 million.
Up 6% from $23.5 million.
In the second quarter of 2018.
Moving to slide number 12, the rail group generated $3.2 million of pre tax income in the second quarter compared to $900000.
Last year.
For the second quarter utilization rates averaged 94.6%.
Compared to 95.7% last quarter.
And the 89.2% in the second quarter of 2018.
The impacts of improved utilization and almost 2000 2000 more cars on lease were offset somewhat by an increase in credit reserves.
Base leasing pre tax income was $2.6 million, which was $500000 higher than last year's result.
Rail recorded income from car sales of $500000 in the quarter.
Those results were much better than those of the second quarter of 2018.
When the group recorded a loss of $3 million driven by a $5 million loss on the scrapping of about 600 cars.
In hindsight it was a very good decision to scrap these cars last year as scrap steel prices have dropped more than 30% since that time.
Railcar repair results were considerably lower due to decreased volume in several repair facilities and to increased workers' compensation and other expenses.
Finally, the group recorded $15.8 million in EBITDA for the quarter, which was comparable to the prior year result, after considering the large scrap loss I noted earlier.
And with that I will turn the discussion back to Pat.
Thanks, Brian .
When we last spoke in May we told you that we expected our overall 2019 company results to be better on an operating basis than those of 2018. When we were we earned an adjusted dollar 63 per share.
While we are pleased with our solid second quarter results earned under difficult conditions. The ongoing impacts of the unprecedented first half weather and the world trade difficulties now lead us to believe that our operating results will be down slightly for the full year.
The trade group performed remarkably well last quarter in unusual conditions.
And the Lansing acquisition is making a strong contribution to our results.
While we anticipate continued trading opportunities and what we think will be a volatile market well into the fourth quarter.
It's also apparent that the corn and soybean volumes available to us this year in portions of our eastern asset footprint will be substantially lower than normal.
What is clear is how the late planting will impact yields, particularly in our northwest, Ohio, Southeast, Michigan and northeast, Indiana dry areas.
On a more positive note the integration of the Lansing and Thompson's businesses continues to go well and we believe we will meet or exceed our synergy estimates.
Yes, well group continues to make the best of an extremely unfavorable margin environment.
Lower negative crush margins presented the group from walking in any forward margins for the third quarter.
Given the current margin environment. The group plans to run its plans to optimize yield and profitability, which will reduce costs and could lower some volumes.
The group continues to make progress on its strategic initiatives.
The Denison, Iowa plant has achieved a low carbon intensity score and the new element plant in Kansas will soon begin to produce low carbon ethanol.
Both plants will target the higher margin, California market.
In addition, several capital projects are underway that will further improved plant efficiencies and generate a series of new higher value co products.
Our plant nutrient group performed well in the second quarter, so difficult weather conditions, but its first half results were still a little more than $4 million lower than those of the first half of 2018.
Because the group's full year results are so heavily influenced by the first half performance recovering that shortfall in the second half of 2019 is unlikely.
Well nutrient margins continue to be stronger than in the prior year fall volumes are typically not large enough for us to be able to make up the full amount.
It is possible that with normal weather higher grain prices and nutrient deficiencies caused by a full crop year of less than typical fertilizer application.
The fall application season could be better than usual.
Rail group leasing income should remain steady over the coming quarters.
Number of cars in service should grow modestly.
I would expect some pressure on lease rates.
The group is closely watching carloadings, which were down more than 3% in the first half.
And there are signs of weakness in certain market segments.
The group is purposely deemphasize generating income from car sales in favor of growing its fleet.
As such we expect income from car sales to remain low compared to the past few years.
We think the repair business will deliver solid second half results.
So in closing we are pleased with our second quarter results, especially given the extreme weather conditions and continued trade disputes.
However, we remain concerned about lower corn acreage in the eastern grain belt and the ongoing trade dispute with China.
We need good growing and harvest conditions, especially in our eastern dry areas.
Were a lower number of corn acres were planted.
Our new larger trade group is well positioned to capitalize on volatile grain markets and we continue to focus on cost efficiency and productivity improvements.
I'll now turn the call back over to Katherine will help facilitate your questions.
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And our first question comes from Eric Larson with Buckingham Research. Your line is open.
Yes, good morning, everyone.
Good morning, Eric.
Yes.
With a good performance in a tough quarter so.
Just a just a couple.
Question did you have any mark should all in the quarter.
I'm, sorry, I fully understand buttressing remarks.
I'm sorry.
And.
Oh sure yeah, so that when we talked about basis levels. So that was the appreciation in the basis levels as part of our gains on specialty wheat, and corn nuts, we didn't see thats much in beans.
So we had some nice markups and.
Premiums for both.
Corn and suffered we.
Okay. Okay.
So so what will you be giving any of that backup in the in the third and fourth quarters.
No one else has given it back up I think the question is do we pull anything forward right. So.
Yes, it's a better way to describe it I think Eric and you know the grain business very well, but historically, we were making storage income on soft wheat and those carrying charges have changed show a year or two ago. When we were making steady income off wheat storage. We don't have that situation today, but we were positioned very well in.
Our basis positions across the country allows us attributable to the new merchandising from Lansing that we enhanced margins during the quarter. The question would be what's it going to look like a third and fourth quarter, we still think thats going to be good trading opportunities with volatility.
As you know Monday will be the WASDE will be out and there's never been a wider spread on estimates of yield so theres quite a bit of uncertainty still in the us grain markets.
Let alone with trying to trade et cetera, so theres going to be quite a bit of volatility. We moved from a 10 on the voltage skill volatility scale up to 30 here recently, that's good for grain merchandising.
Yes, actually nice to have some volatility back its.
It's been several years since we've actually had the ability to do any of this.
So.
Really quickly on fertilizer.
I know that.
In the quarter.
The Mississippi wasn't shipping for I think like six weeks.
So you weren't able to get fertilizer coming up from from NOLA.
And I believe that probably was what gave you.
The internal fertilizer margins coming in the upper in the Midwest was probably pretty good if that would explain the margin improvement that overcame your volume shortfall.
I think thats part of it Eric because we are a rail delivery points may have come from Canada and up from Florida. So we're not dependent on Gulf barge deliveries for the most part okay, but that didnt cause a lot of competitive pressure on margins as you pointed out I think more of it was we just had rain rain rain, especially in a lot of our Ohio, Michigan, Indiana locations. So just really hurt us on volume the worst we've seen for many many years.
But margins held in there pretty good and we should see a pretty good fall application.
But we just couldn't make up for that lost volume with the amount of acres that didnt get planted with prevent plant.
Another switch to beans.
Got it okay. So then the and that makes sense.
Got a lot of questions I don't want to hog the call here, but.
When we look at your.
Thank you our guidance for 2019, one of the questions that I have I make my own adjustments for.
For some of it I want to make sure that were I understand where your dollar 64 or excuse me $1.63 is coming from next year, but in the base for this for 19 are you using are you using 43 cents loss in your first quarter or Kevin when you think about the year that we should be modeling.
Should we view as being a six cents loss just away some of those one time items.
I'm just trying to make sure that we're all dealing from the same.
Actual earnings from the first half.
Yes, so Eric this spring, we're using the six cents six cents loss if you will.
Yes, yes, yes that is what I am using salt.
And so go ahead go ahead.
No. No go ahead I just want to make sure that we're on the same page of assess that's all.
Yes, so we're adjusting for the call a transaction related items, specifically the stock comp and transaction stuff, but we are not formally adjusted adjusting for the depreciation and amortization go ahead John .
Yes, Eric This is John what I would say is that when we when we use the term operating basis, we are adjusting for the depreciation and amortization, even though we're not formally doing so.
For reporting purposes that make sense to you.
Yep got it yes, no that makes sense I just.
Yes, again, I just want to make sure that we're kind of all dealing from the same.
No the same earning space, particularly now in the first half so that we can.
Make sure that we can get to where path is trying to lead us for the full year.
And we are.
Well I was going to say I was going to say, Eric we hope that the slide that we put in the deck will help you with the with the third and fourth quarters as well.
Yes, I am sure that damn sure that that well I guess I just want to make sure that we are kind of all coming from the same date of earnings.
Agreed.
So then the final question here and and Pat This is.
Obviously this has been a very unusual.
Oh planting here, we all we all know about him this years, making 95 kind of look like a picnic.
So.
The eastern corn belt has been hit very severely.
Probably more so than the rest of the country.
Yes.
Your internal interpretations here with fit with the spreads where do you think some of the.
What do you think the production for corn and beans comes out this year I mean.
Obviously, we're not going to hold that hold back.
To you but.
What's your best guess on it.
Yes, and that's what's so interesting and like I said for Wasnt, a Monday that the trade guesses are all over the map and I think it has really regional and could even be county by county.
With the acquisition of Lansing, our footprint broaden.
Considerably with assets as far west as Idaho, as far South as Louisiana, let alone in Kansas, Nebraska et cetera, we have many parts of the country that have outstanding looking corn crops.
Right here in our traditional backyard.
North West, Ohio was one of the worst parts of the country with corn getting in late the interesting thing is.
I was just talking to someone in central Illinois.
Temperatures have been not too hot we had all that early moisture.
We're getting really good.
Growth in the plan. If the question is what will the fill look like and ultimately what will yield speed.
I think we got to give a lot of credit to American farmer was very adaptive and really has done a great job producing huge crops I am a little bit more I think we'll have pretty strong production and the demand side, just isn't getting any better and the China talk and the potential with.
African swine fever may be leaking into other southeast Asian countries, I mean, theres a concerned more about demand. So we're really focused on our domestic trading and how we merchandise between the millers and crushers and ethanol plants in the U.S. and we think there would be lots of opportunities this year.
To optimize around that.
Okay, I'll pass on and congratulations Corie for for a great second quarter here for you guys.
Thank you.
Thank you.
If you would like to ask a question.
And the one.
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One moment for questions queue up.
And I'm showing no further questions at this time I would like to turn the call back to Mr., John clouds for any closing remarks.
Thanks again Kathryn.
We want to thank you all for joining US. This morning, I also want to mention again that this presentation and slides with additional supporting information will be made available later today on the investors page of our website at the Andersons Inc. Dot com.
Our next earnings conference call is scheduled for Wednesday November six 2019 at 11 am Eastern time, when we will review our third quarter 2019 results. We hope you can join US again in that time and until then be well.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect everyone have a great day.